Calumet, Inc

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2021 Calumet Specialty Products Partners LP Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Brad McMurray of Investor Relations. Thank you. Please go ahead.

Thanks, Phyllis. Good morning, everyone. Thank you for joining us on the call to discuss our first quarter results. I'm joined today by Steve Maher, CEO, Todd Borgman, CFO, Bruce Fleming, EVP, Montana Renewables and Corporate Development, Scott Obermeyer, EVP Specialty Products and Solutions, and Mark Long, EVP Performance Brands. Before we proceed, allow me to remind everyone that during the course of this call, we may provide various forward-looking statements. Such statements are based on the beliefs of our management, as well as assumptions made by them, and in each case, based on the information currently available to them. Although our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the partnership, its general partner, Please refer to the partnership's press release that was issued this morning, as well as our latest filings with the SEC for a list of factors that may affect our results. We may also reference and discuss certain non-GAAP measures. Please see the earnings press release and slides for reconciliations to GAAP financial measures. As a reminder, you may now download a PDF of the slides that will accompany the remarks made on today's call in the investor relations section of our website, www.calumetspecialty.com. A webcast replay of this call will be available on our website within a few hours. You can contact our investor relations department as needed for support. With that, I'll pass the call to Steve. Steve?

Good morning, everyone, and thanks, Brad. It's good to have you on our team. Like pretty much everyone in similar lines of businesses and geographies, our first quarter results are dominated by a single one-time event, the impact of winter storm URI and resulting production losses. Our first quarter adjusted EBITDA was negative $5.4 million. Despite these challenges, our performance brands and our specialty products and solutions segments maintained or improved unit margins despite a dramatic increase in crew prices during this quarter. This clearly continues to demonstrate our ability to minimize the impact of price volatility and continues the excellent work demonstrated by our team during 2020. In late February, our Shreveport refinery was successfully and safely completing its largest turnaround in a decade. As we prepared for the restart, URI bore down on northwest Louisiana. A 10-day hard freeze created a humanitarian disaster for the Shreveport area with loss of municipal water, roads unpassable for most of that time, food shortages, and power outages. I go into that detail to demonstrate the level of challenge presented to our teams at affected locations in Louisiana and Texas. We're really proud and appreciative of our colleagues. They worked long, long hours to fix hard freeze damage while contending with personal weather-driven challenges and in many cases also helping their communities during this time of significant need. Nevertheless, the combined impact of repair costs and volume loss affected our first quarter by an excess of $30 million. A hard freeze on an entirely cold plant presents additional challenges and results in additional damage and additional diagnosis time. Our forward-looking picture is as promising as it has been in many a year. Building on my comments on the last call, we continue to be able to sell everything we can make. Furthermore, the economy appears to have only strengthened thanks to the vaccine rollout and the and the economy reopening. Back in late 2020, our team looked forward and termed 2021 as the year of the price increase. We expected stress on the input side, be it basic feedstock costs or supply chain disruptions, and prepared accordingly. The reality was more pronounced than even we expected, but we've been able to minimize that impact. Although, like everyone, we have had at times needed to scramble to source materials and transportations, we've still been able to set records in our performance brands business, hitting our first million-gallon true fuel sales milestone in the month of January and maintain good unit margins in our specialty products and solutions businesses. Strategically, we continue to make good progress. Earlier this week, we launched the process to redeem $70 million of our 2022 unsecured notes. We also completed our business resegmentation process, recently filing an 8K, providing investors more insight and transparency, and investor feedback about these actions has been very positive. Progress on the Montana Renewables Project is more than satisfactory. The process of de-risking and beginning execution of the project is on track, and partner discussions are productive. Given the exceptional nature of this ultra-competitive project, Todd and I will get into it in more depth later in remarks, and Bruce will also be here for Q&A. So with that, I'll hand over to Todd, who will be taking you deeper into our results. Thanks, Steve.

Moving to slide four, I'll discuss our summary financial performance, then we'll dive into the segments a bit further. As Steve mentioned, we lost $5.4 million in adjusted EBITDA during the quarter as we battled winter storm URIE. Our specialty products and solutions segment bore the brunt of the storm, resulting in a $2 million adjusted EBITDA loss. Performance Brands generated $16 million for the quarter, and Montana Renewables lost $2 million of adjusted EBITDA. Additionally, costs from our corporate segment were just over $17 million for the quarter, down from $20 million in the same period a year ago. This is the first quarterly earnings call where we've been able to report specialty products and solutions performance brands, and Montana renewables as separate segments. And we released an AK last week, providing full-year 2019 and 2020 results, recast by segment. Further, we've removed the mark-to-market impact of RENs from adjusted EBITDA, which aligns with the approach we've taken historically for all other non-cash mark-to-market gains and losses. The goal of our reporting changes is to generate better financial, operational, and strategic insight into our business. and to display our businesses through the same lens that management uses. On the last earnings call, I mentioned that we would be using the $70 million of proceeds from the Shreveport fuels terminal sale leaseback to pay down debt as soon as we got the Shreveport turnaround comfortably behind us. It took a little longer than originally planned given the freeze, but Shreveport is up and running, 49,000 barrels a day of feed, and we launched that call process this week. The process of calling these notes will be complete in early June. Our liquidity did not change significantly during the first quarter, and we continue to have plenty of availability. Moving to segment financial performance during the quarter, let's turn to slide five and discuss specialty products and solutions. You already heard about the impact of this report turnaround in URI, and the effects were most visible in this segment. As year-over-year production was down 47% in the quarter, and early in the second quarter, we've been replenishing inventories throughout our supply chain. Despite the challenging quarter, I want to point out the unit margins being generated in this business. Steve alluded to it earlier, but grid costs increased approximately 30% over the quarter, and we had to purchase higher than normal quantities of third-party finished materials, yet specialty material margin were up over the past two quarters. Material margin is an operational metric we've established in this segment, to provide investors visibility into specialty margins, while also providing clear insight into the volatility that comes from fuels, asphalt, and intermediates that are made as byproducts of the specialty production process. We did not receive much financial contribution from fuels in the first quarter, but future cracks are substantially improved from levels we've seen over the past four quarters. On slide six, you'll see more detail underlying the strong growth in our performance brand business, and we are excited to now be providing this segment on a standalone basis. We produced $16 million of adjusted EBITDA in the quarter, which is stronger than the 2020 quarterly average, despite a favorable feedstock environment in the middle of last year. Further, the first quarter is traditionally a weaker one, and compared to Q1 of 2020, the segment's adjusted EBITDA was up 51%. In January, we had our first million-gallon month of true fuel sales, And to support growing demand for the brand, we kicked off a small growth project to expand our packaging capacity for larger quantity cans. TruFuel gets a lot of attention, but it is not the only story in this division. Part of the increased adjusted gross profit on a unit basis is mix-related and comes from growth in high-margin Royal Purple and Belray sales throughout the quarter. We're very pleased with the growth we're seeing across all three of the iconic brands in this business. Let's turn to slide seven. Our $2 million adjusted EBITDA loss in Montana renewables was down $8.4 million versus last quarter. Typical seasonality in the asphalt business combined with the rapid increase in crude price accounted for the majority of this difference. Pad 4 has always been a great place to be a refiner with plenty of seasonality, and given recent improvement in cracks, asphalt, and WCS diffs, we're excited to be moving into the spring and summer months. Let's flip to slide eight and talk more about our Montana Energy Transition Project. First, let me start by saying that we have an awesome team in Great Falls, and we expect to keep full employment at the site as we convert the refinery. To explain how, I'll provide a short history of this plant at Calumet. In 2012, Calumet purchased a 10,000 barrel a day niche specialty asphalt refinery. In 2016, The company spent $450 million installing an oversized hydrocracker and meddling up the plant with 317L stainless steel in order to run discounted highly acidic feedstocks. Last quarter, we announced the Energy Transition Project, which will convert this same hydrocracker into renewable diesel service, leaving behind the original plant to operate as it used to, albeit in a meddled-up and improved state. As I mentioned, the hydrocracker is oversized and already contains the metal needed to process highly acidic renewable feedstocks. From here, we can simply change the catalyst, convert some tanks, expand dewatering, and we'll be in service. We plan to make this catalyst change in April of 22, and we'll be producing 5,000 barrels a day of renewable diesel thereafter. Internally, we think of this as the first module. It's straightforward. utilizes existing equipment, and gets us to market extremely quickly. After this module is complete, the hydrocracker still is way underutilized. Remember, today this unit produces over 15,000 barrels a day of diesel fuel and has a nameplate capacity of 24,000 barrels a day. But our existing hydrogen plant will be maxed out at 5,000 barrels a day marks. So the second module is constructing a renewable hydrogen plant to unleash more capacity. This second phase gets us to 10,000 barrels a day of renewable diesel production in the second half of 2022. The renewable hydrogen will significantly lower the carbon intensity of the product, thus improving overall economics of the project. So on the feed, which is the question we get asked most about, we expect to start up next spring on soy. because it's the fastest, lowest risk track. Discussions with suppliers are ongoing, and we are evaluating offers while at the same time balancing strategic partner interests and allowing for feedstock flexibility. Adding pretreatment to provide max feedstock flexibility is the third module. It's one that clearly adds tremendous value and flexibility, and it can be done relatively quickly. Another benefit is that non-soy feedstock can be sourced locally. To be clear, All investor materials provided today assume exclusively soy economics, which are by far the most conservative. I'm going to turn it over to Steve to add a little more about the project and wrap up, but I'd summarize the project both internally and externally as something that is moving quickly with great enthusiasm. The state of Montana is business friendly, and this project is great for the local area. We have an existing facility with the right geography, equipment, and logistics that set us apart on capital costs and speed the market. And we're currently evaluating supply and offtake contracts that we're balancing with strategic partnership discussions. Steve, back to you.

Thanks, Todd. So let's go to slide nine with a summary and outlook. As you can see, and Todd talked about, we made significant progress on the Montana Renewables Project. both in terms of speed to market and further verification of its exceptional position as a leading RD conversion project. At the very highest level, the best de-risking of any investment is to have an asset that performs well through any and all cycles, and we believe that the Montana project certainly does that. The project competes either as a standalone renewables project or as a dual conventional renewable train, where the conventional side can provide an additional counter-cyclical high cash flow risk mitigation. Over the short term, we further de-risk by high speed to market at low capital investment. Over the medium term, we de-risk through our modular approach to implementation, which makes the execution easier and cheaper and spreads out the investment on-ramp over time. Finally, Our existing metallurgy means that the transition to multi-feed processing appears to be immediately practical, if not inevitable, and that's at low cost and in pretty short order. Based on the very significant interest in partnering with us, we're also comfortable that we have substantial external recognition that we have a top-notch project. Pretty much all the projects that sit just behind us on the competitive stack are proprietary within existing corporations and will not be available to direct investors. So partnering with Montana Renewables is a unique offering, and that uniqueness has been recognized. Building and closing the right partnerships for this project is proceeding nicely. We really appreciate the investors' and analysts' interest in this process, but at the same time, I doubt the process will be best served by Twitter-like updates of exactly where we are. we remain focused on creating as much value for the unit holders of Calumet as possible. In that light, playing the game with all our cards face up on the table, although it's a lot more interesting for the audience, is not medium-term value maximizing. It may frustrate people. It may lose us some short-term special situations investors. But to build on the card game analogy, this will be much more like a game of gin rummy than a game of bridge. There's a path to significant unit holder value here, and that's best served by a focus on completing the partnership process, and then there will be time for communication. Rest assured, we're moving forward with appropriate haste, not excessive haste, but with the motivation that this opportunity is central to completing positioning Calumet on an exciting forward trajectory, and therefore, this is our greatest priority behind the safe operation of our plants. Moving on more generally, on outlook. The bulk of URI disruption is behind us, although on select product lines, we're still rebuilding operating inventories and finishing the stabilization of our supply chains. More generally, like all of you, we're excited about the reopening of our economy and the level of intense demand response that we are experiencing. We ask ourselves if, how, and when this eases, but in the meantime, this brings benefits to us in both demand and margins across our entire product line both specialties and fuels. The cost and efficiency measures we implemented in 2020, together with our decision to not make distressed asset sales during the pandemic, should give us additional operating leverage to this upside situation. Additional group prices look eminently possible. And although the second half of 2020 and the first quarter show that generally we're able to mitigate the price lag effect that you can see in specialties, this issue will require continuous vigilance. The other challenge that comes with strong economic activity is that supply chain issues also don't look like they're going away. We started prioritizing this issue back in 2020, building more system redundancy and options. But a big part of managing this is the real-time response of our dedicated and hardworking team who do great work every day making things happen for Calumet and our customers. That concludes our remarks. Thank you very much for joining us today, and thank you for your interest in and support of Calumet. So with that, I'd like to turn the call over to the operator to open up the line for Q&A.

Again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. To ask a question, please press star, then the number 1. Your first question comes from the line of Greg Bode with Bank of America.

Good morning, guys. Hopefully you can hear me okay.

We can. Good morning, Greg.

Good morning. Thanks for the comprehensive update. Maybe I could just start, just follow up on the renewables project. You've laid out a path for, looks like by April of next year, After the catalyst change, you'll have 5K of capacity and 10K by the second half. Will the refinery have to go offline before the April 22 catalyst change to prepare for that first phase?

Hey, Greg, good morning. It's Bruce. The answer is no. April is a scheduled refinery-wide turnaround. That's what makes it the right time to get into the hydrocracker for the catalyst switch, and final separation of the oil moving activities on the site. But there's no pre-shutdown.

Got it. And, you know, this quarter, the Montana refinery looked to be a bit weaker than a year ago. I see you mentioned the Canadian dips being a driver. Maybe you can walk us a little bit through what you expect out of that business going for the rest of this year and where we could see some improvements in margin.

Yeah, so Greg, one of the reasons we put the Rockies crack spread environment into the slide deck is to highlight that this is within, easily within the range of normal market volatility. The refinery ran full through this quarter. And it's simply external price environment. There's no trend to that. The chart we put in shows a $40 crack spread environment, generally in the Rockies. And I can tell you, if you extended that chart back for 13 years, you'd get the same $40, no trend line. So that's the external condition. But you're going to see a lot of volatility to it. And I think that's all that we are experiencing.

Do you think it's fair that – is this from finally experiencing the recovery that others are experiencing right now? I see the cracks up, but I just would have thought the quarter would have been a little better in that particular business. You mentioned volatility, but I guess is that abating – what are you seeing through the first month of the year?

Yeah, I think if you pull the price series that you guys use in your model – you're going to find it's ticked up sharply just in the last six weeks. That's a portion of normal seasonal component and a portion of the commodities complex lifting. We do have the WCS diff moving favorably toward us, but still below WCS differential average historically.

Got it. And then coming back to especially products and solutions, where I think we saw the majority of the $30 million impact this quarter. Is that really residual this quarter, or is that all behind us?

The plants up and running, Greg, this is Todd. Thanks for the question. You know, plants are up and running now, have been running fairly well this quarter. You know, we did have a little bit of inventory rebuilding and supply chain building in April. So, you know, probably a little bit of delay early in the quarter getting all those sales out to the customers and recognized. But the good news is we are up and running fully and, you know, as of May here should be recognizing full quarters.

So this quarter will have some impact, but it sounds like you've got it.

Yeah, we'll see how much we can make up. We're producing as hard as we can, and strong demand out there have quite a backlog of orders. So we're not expecting just to get inventories replenished. We're going to keep oil moving out the door as fast as we can. But it'll take a couple months to work through that whole process.

Okay, and I've got one more here before I hop back into the queue. So obviously the Supreme Court argument started last week with respect to the small refinery exemption case that we're waiting anxiously to get results from. In the event that, obviously if the Supreme Court reverses it, that's great for you, but if they don't, if they maintain the ruling, how does that play out with respect to your options from that point in terms of having to pay it? And can you talk about how you would have to fund it if it really went against you?

Well, Greg, I think there's multiple questions in there, kind of hypothetical building on hypothetical. So,

I think the real, just to make it simple, because I mean, the simple question is, if you have this liability, if the ruling goes against you, how do you deal with that liability? Is there cash that you need to post sooner than later? Are there appeals there? I recognize the case may, I'm just trying to understand how to think about that liability.

Greg, it's Bruce. Remember, RINs are not money. RINs are a quantity of of demonstrated blending. And none of these are due yet. The EPA has extended all of the timelines. So, you know, there's a long road and there is a nest of court activity besides the narrow one around Holly Frontier that's in front of the Supreme Court. So I think it's not bimodal as you posit it. I think it's a... It's a thicket, and, you know, we see a couple of ways through. But, you know, I might direct you to the fact that the renewable diesel project more than covers the issue that you're bringing up.

And I appreciate that. I'm just wondering if there is a cash need in between the time that comes online.

Greg, we don't believe that's the case. I think whatever the Supreme Court rules, it's just the beginning. Even though the Supreme Court would appear to be the final voice, it's just the beginning of a process both ways.

Great. I appreciate that. I'll hop back into you guys. Thanks for the time.

Your next question comes from the line of Neil Mehta with Goldman Sachs.

Hey, good morning, guys. First question is just on gross margins at the specialty products business. They seem pretty durable in the first quarter, despite the rising crude price environment. Can you just talk to us about how do you think about those gross margins, sustainability, if oil prices continue to grind higher?

Neil, Scott Obermeyer, thanks for the question. I would probably make a few comments to your question. The first would be, as you know, Neil, we've talked a little bit about it the past year or two. We've been really focused commercially on improving our skills and our mindset on extracting the full value and implementing pricing and various commercial excellence activities. And so I think that the team's come a long way the past couple of years, and I think that's shown in our results, Neil. And we've been thrust tested, if you will, last year as crude spiked up and in the Q1. And so we feel that the business is resilient, demand is strong, and we've got the right execution in place to handle, frankly, any type of feedstock volatility or market volatility at this time.

Yeah, Neil, this is Steve. This is Steve. If I could add, I mean, so... So we've ridden the market from minus 40 to plus 65 on crude with reasonable success so far. Demand remains good. So I think we're comfortable with our macro ability, like Scott says, to manage it. And then there's always going to be some mix effect at the margin. And I think we think between Q1 and Q4, the mix effect was kind of neutral. There were some positives to the mix and negatives to the mix. But I really think that kind of the macro works, and then occasionally there's some mixed noise around it.

Thank you. And I appreciated your comments around Shreveport, and hopefully your team was able to stay safe and make it through this strong. As we think about the 1Q EBITDA specialty that was obviously softer than expected, largely because of volumes, Can you talk about what the lost opportunity profit was from the downtime, if you have that number?

Yeah, I think, you know, this is Todd. You know, we said the freeze cost us $30 million. Turnaround probably cost us 10 on top of that. And, you know, mostly in lost opportunity. So we haven't broken it out specifically. We have internally between lost opportunity and, you know, in actual, you know, specific volume charges. But, you know, I think it would be safe to say, you know, $25 million, $30 million of that is, well, I shouldn't say that. It's lost volume. There's another $10 million on top of that that's roughly lost opportunity.

So $35 million to $40 million, that's a pre-tax number.

Correct.

Keep it down. Keep it down. Thank you.

again if you would like to ask a question please press star then the number one on your telephone keypad that was star one and at this time there are no further questions I would now like to turn the call Back over to Brad McMurray for any closing remarks.

Thank you, everybody, for your time. Have a good weekend. Goodbye.

That does conclude today's conference. We thank you for participating. You may now disconnect.